How Would The Parties Tax And Spending Plans Affect Scotland And Wales?
30th June 2024
This ‘explainer' from the Institute for Fiscal Studies looks at how the parties' proposals would affect Scotland and Wales, covering tax, spending, public finances and the constitution.
The UK general election on 4 July will determine the make-up of the House of Commons and, in turn, who forms the next UK government. For some of the issues at the heart of the election - such as defence spending and most taxes and benefits - the UK parliament and government make decisions for the UK as a whole. However, other issues - such as health and education - are devolved to the governments of Scotland, Wales and Northern Ireland.
Decisions in Westminster still matter though, because funding arrangements mean UK government tax and spending decisions affect how much the devolved governments can spend in their countries via the operation of the ‘Barnett formula' (which bases changes in funding for the devolved governments on changes in spending in England). Table 1 provides a summary of which areas of policy are controlled directly by the UK government, and which are devolved to Scotland and Wales, meaning that decisions taken in Westminster do not apply in these nations but the funding available to their devolved governments may change.
Working out exactly how the policy proposals contained in the parties' manifestos will affect Scotland and Wales can still be difficult though - especially because the parties sometimes try to blur the boundaries between national and devolved responsibilities when describing their policies. This report is therefore our attempt to provide a guide to the impact of tax and spending policy proposals on Scotland and Wales. We focus on the two largest UK parties (the Conservatives and Labour), as well as the SNP in Scotland and Plaid Cymru in Wales.
At a high level, while Labour propose slightly higher taxes and spending than the Conservatives, both parties' manifesto proposals imply cuts to investment spending and modest increases in overall day-to-day spending on public services. It would be up to the devolved governments in Scotland and Wales to determine how to allocate their funding across services, but facing the same pressures on healthcare as England, the devolved governments would likely need to make cuts to at least some ‘unprotected' services, unless they were to increase their own taxes. The SNP propose a substantial boost to both investment and day-to-day public service spending UK-wide, as well as increases to working-age benefits, funded by higher taxes and higher borrowing. In England, Wales and Northern Ireland, the boost to day-to-day spending would probably be enough to avoid cuts to ‘unprotected' services. The way the SNP propose to part-fund these increases (via income tax increases largely only applying outside of Scotland) means that the boost to spending in Scotland would be smaller. Plaid Cymru do not provide a costed set of proposals on tax and spending, making their overall plans hard to assess. But it is clear that they favour higher taxes, borrowing and spending than both Labour and the Conservatives, and they argue for reforms to funding allocations that they claim would benefit Wales.
Key findings
1. Most of the tax changes proposed by the Conservatives and Labour would apply nationwide, including cuts to National Insurance contributions from the Conservatives and plans to levy VAT on private school fees from Labour. The exception is the Conservatives' proposed stamp duty land tax cut, which would apply only in England and Northern Ireland. Taxes would rise as a share of national income under both, but by a bit more under Labour than under the Conservatives. Plaid Cymru and the SNP propose tax changes at the UK level that would involve bigger increases overall than under either Labour or the Conservatives, as well as further tax devolution. Somewhat surprisingly, the biggest tax change proposed by the SNP (for the UK government to adopt the Scottish Government’s existing income tax bands and rates) would largely only apply outside of Scotland.
2. The Conservatives propose to reduce benefit spending compared with forecasts but do not explain how they would fully deliver the reductions. Any reforms to disability benefits would not directly apply in Scotland but would instead affect the Scottish Government’s funding. This would mean that, unless it cut the generosity of its own benefits, it would have to raise taxes or cut other spending. Labour have pledged to review universal credit and incapacity benefits, which apply across the UK, but make no concrete pledges. Both Plaid Cymru and the SNP propose substantial increases in the generosity of the benefit system, particularly targeted at families with children. They also ask for further devolution of benefits policy.
3. The small tweaks to public service spending in the Conservative and Labour manifestos would still likely leave many unprotected areas of spending and investment facing cuts post-election. Plaid Cymru do not say how much they think should be spent, but their proposals for specific services would require higher spending. The SNP propose significant top-ups to day-to-day spending and investment that would be more than sufficient to avoid cuts to unprotected areas and investment in the rest of the UK. However, the way the SNP propose to fund spending increases in the rest of the UK means that Scotland would not see as big a boost to spending as England, Wales and Northern Ireland.
4. The plans set by the Conservatives and Labour would, on current forecasts, be just about enough for government debt to fall as a share of national income by 2028-29. But the difficulty of forecasting means that in reality, even if the parties’ plans were stuck to in full, there is little more than a 50:50 chance of debt actually falling in that year. Plaid Cymru do not provide sufficient information to calculate the impacts of their policies on borrowing and debt, but both would likely be higher than under Labour or Conservative plans. The SNP propose higher borrowing, within a new set of fiscal rules, but which would leave debt increasing as a share of national income into the longer term.
5. Both the Conservatives and Labour reject Scottish and Welsh independence. Plaid Cymru and the SNP are, unsurprisingly, in favour. While correctly highlighting the austerity implicit in the main UK parties’ spending plans, the SNP and Plaid Cymru skirt around the significant public finance challenges an independent Scotland and Wales would face in at least their first few years, necessitating tax rises or spending cuts.
6. The Conservatives and Labour say relatively little about devolution to Scotland or Wales. Plaid Cymru and the SNP would like substantial further devolution of spending and regulatory policies, including ‘levelling up’ funds. Here, Labour propose some role for ‘representatives’ of Scotland and Wales, but it is not fully clear what role that means for their devolved governments as opposed to these countries’ Westminster MPs. The Conservatives propose to abolish one of the main levelling up funds from 2028 to fund their UK-wide ‘National Service’ scheme. The SNP and Plaid Cymru both propose substantial further devolution to their nations - with the SNP’s proposals for ‘full’ tax and social security proposals requiring an entirely new funding model for Scotland.
[b]Independence[/b[
One area where both the SNP and Plaid Cymru fail to properly discuss the public finance implications – and hence the potential tax and spending implications – is independence.
The SNP put Scottish independence front and centre of their manifesto and say that there would be a mandate for a second referendum if they win a majority of Scottish seats. Plaid Cymru focus far less on independence, but their manifesto restates it as a goal, and proposes a Green Paper on how it could be achieved. Both the Conservative and Labour manifestos reaffirm their parties’ opposition to independence and a second Scottish independence referendum.
The reason independence is a public finance issue is twofold.
First is that independence would affect the economy, which in turn would affect the public finances. The SNP and Plaid Cymru highlight potential economic benefits from independence, including a boost to trade and growth from rejoining the EU – which in the long term is possible, although not certain. In the short term, however, independence would likely prove economically disruptive, especially if it entailed additional trade barriers with England (which would be the case if an independent Scotland or Wales rejoined the EU) – which is currently by far the largest trading partner of both Scotland and Wales.
Second, both Scotland and Wales receive much higher levels of public spending per person than the UK as a whole. In Scotland’s case, revenues per person are similar to the UK average, while Wales’s relatively low incomes and weaker economy mean its tax revenues per person are much lower than in the UK as a whole. This means that, in effect, Scotland and Wales receive fiscal transfers from the UK that would be lost at independence. Both an independent Scotland and an independent Wales would start life with much higher levels of borrowing, relative to their size of the economy, than the UK as a whole and these would need to be addressed. The SNP manifesto skirts around this issue, while Plaid Cymru cite research suggesting a manageable deficit, but which, among other things, assumes the UK government keeps paying state pensions post-independence (which seems highly unlikely).
In the longer term, then, there is a possibility that a different policy mix could boost the economy and improve the public finances of an independent Wales or Scotland, allowing higher spending or lower taxes. But in the first decade at least (and probably much longer in Wales given its particularly weak fiscal position), the opposite would almost certainly be true: taxes would need to be raised or spending cut significantly to address the large budget deficits these newly independent nations would start life with.
Read the full IFS report HERE
